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Malcolm Turnbull's reliability and emissions guarantee explained

Malcolm Turnbull's reliability and emissions guarantee explained

Chief Scientist Alan Finkel envisaged the Energy Security Board as a way of streamlining the cumbersome tripartite regulatory structure of the National Electricity Market.

In two months since it was set up the Energy Security Board may have already proved its worth and exceeded Finkel's expectations.

In that time the board has taken the unfinished business of the Finkel review - the Clean Energy Target and the renewable generator reliability obligation
- and re-engineered them into something the regulatory agencies reckon can work better.

It does this by focusing on the whole market and putting the onus on the retailers to sort out the details from their vantage point right in the engine
room of the market.

Finkel maintained the emissions trajectory should be the determinant of the generation mix but modelled a clean energy target to deliver on Australia's
Paris commitment of a 28 per cent emissions reduction by 2030, buttressed by a range of reliability measures.

If the board's proposal is accepted by the states, retailers and large energy users connected to the grid will have to comply with a Reliability and
Emissions Guarantee.

The federal government will set the emissions reduction target and the Australian Energy Markets Commission will translate the national emissions reduction
target into a target for each retailer and large energy user connected to the grid.

The AEMC, the rule maker, will set up a Reliability Panel which will lay down a national reliability standard.

The Australian Energy Market Operator, the agency that runs the market, will take the national standard and convert it into a regional operational
standard for each market region.

The regional operational standard will determine what percentage of each retailer and large user's supply or consumption must be covered by which type
of dispatchable, flexible supply.

This could include a fixed percentage of fast-start generator - a rough proxy for gas peaking plants and batteries - or slow-start, long duration dispatchable
generators - a proxy for coal.

Battleground

There is potential for the coal versus renewables battleground to migrate here.

But board chairman Kerry Schott, a former investment banker and Sydney Water chief well versed in the politics as well as the business of infrastructure,
says she is confident they've taken this as far out of the realm of politics as they can.

Once the retailers and large users have their reliability, or dispatchable supply, and emissions standards for each regional energy market, it will
be up to them to procure the optimal portfolio of energy resources to meet these standards.

They can do this by direct investment in generation and storage, or by contracting with other generation companies for the mix of resources they need.

If they fall short of the emissions standard they will be able to cover some of their liability by buying carbon credits locally and internationally.

The Australian Energy Regulator will monitor compliance and wield the ultimate sanction of disconnecting a retailer or large user from the national
energy market.

The board argues that this will achieve larger reductions in wholesale prices and residential prices because retailers can procure the generation they
need to meet their targets from all types of new and old generators with high and low marginal operating costs.